Small business insurance is one of those essential but slightly confusing things that all small business owners need to get on top of. Choosing who to insure your small business with is difficult enough, but there are also a variety of products that you really should understand before you even start shopping around, the main thing that most small business owners don’t realise is that most small business insurance is actually optional. The one insurance product that is a legal requirement for all businesses that employ people is Employers Liability Insurance – it doesn’t matter if the business is a sole trader or limited company or whether the staff are paid or voluntary – you must have insurance to protect the interests of your staff should they be injured whilst at work.
What is employers liability insurance?
Employers liability insurance is there to protect your employees, not really to protect your business (although it does do this as a side effect). It’s unfortunately quite common for people to be injured at work and the reason that employers liability insurance is compulsory is to make sure that the injured employee can have all of the costs associsted with their care and/or compensation covered – for example, if a very small company was found to be responsible for the death of an employee, it’s unlikely that they would have the cash in their business to pay the costs and compensation required, which can run into hundreds of thousands of pounds – their insurance company, however, should always have the finances to cover any costs. One thing to keep in mind, even if you are the only director of a limited company and you have no employees, technically speaking, you are an employee of that company (even though you own it!) – it’s worth checking this with your insurer while you’re getting quotes as some don’t see it as compulsory whilst others do.
The main types of ‘optional’ insurance
We’ve classed employers liability insurance as ‘compulsory’ because, for the large majority of businesses, it is. The optional insurance products are those that change becasue of the type of work you do, rather than how many people you employ – however, for a small number of businesses such as accountants, solicitors and architects, Professional Indemnity insurance is compulsory.
Public (3rd party) liability insurance - as the name suggests, this insurance is to cover people other than you and your employees who could be injured as a result of your actions (or lack of action). If any of your work involves visiting other peoples property to carry out repairs or building work, for example, then this type of insurance is essential. It also covers people who visit customers premises to sell products or services - what if you knock a priceless vase off a shelf or put a briefcase on the floor and someone trips over it and breaks thier leg? Ok, they might not be the best examples, but in our compensation culture, they’re the type of claims that happen all too often.
Professional indemnity (PI) insurance - PI insurance covers your business against claims as a result of ‘services’ that you give to customers rather than physical activities that result in something being damaged. Generally, PI insurance is for professional people such as engineers, consultants or designers who either tell or advise other people or companies how to do something. For example, a structural engineer might design a building that later collapses – the problem is not how it was built, but that the calculations for the sizes of beams were wrong – in this case, the person who produced the designs would be sued for the cost of rebuilding and their PI insurance would cover the costs. Similarly, if a management consultant told a client to run their business in a certain way and this caused the business to fail, then the business owner could sue the consultant because their advice was incorrect – again this would be covered by the consultants PI insurance.
Product liability insurance - this type of cover is only required if you actually manufacture or repair products, just the same as 3rd party and PI, but this time your business is covered if a product it manufactures or repairs proves to be defective and injures someone or causes some other damage. All manufacturers and repairers of products should consider the potential harm that their product could do and more to the point, what the cost of that harm could be – the costs associated with repairing damage might not be too high, but just like the products above, product liability insurance should cover your business against legal defence costs which can be the most expensive aspect of settling a claim for damages.
The other optional insurance packages
To most companies, having employers liability insurance and one of the three liability insurance products above is almost a given. The problem for insurance companies is that due to the amount of competition in their market, the profit made on the policies is not as high as it used to be. For this reason there are now many different ‘soft’ insurance products available (that are pushed as a hard sell when taking out other small business insurance). To be honest, there are too many to go into here, but they range from covering directors against illness or fraudulent behaviour to insuring thesigns around your building against damage or vandalism. There are literally dozens of products which may or may not be required or suitable for your business, the difficult question is knowing which ones will provide genuine protection from a realistic possibility of a claim and which ones are just going to be a drain on your finances with a very small likelyhood of ever being used.
How do I choose the right insurance products?
The million dollar question and, unfortunately, the one to which there is no right or wrong answer. It’s almost no good asking an insurance salesman or broker, because they earn commission on what they sell and will tell you that you need all of their products because they’re the best – the best way to choose, is to have an honest look at what you do and ask yourself what claims could arise. The chances are that buying employers liability and either third party, professional indemnity or product liability insurance is something that you’ll just do to give yourself and your customers peace of mind – the thing that has a large impact on your premium is the level of cover you opt for – you don’t need to take out £5m of cover if all you do is a bit of landscape gardening, but if you design skyscrapers for a living, you’re going to need very deep pockets to cover the premiums. Getting the right insurance is all about balancing the risk with the cost and reading the small print very carefully to make sure you’re covered.
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